Taming the CAP monster

At last, European governments have begun to tame the Common Agricultural Policy. There was a time when this insane subsidy for farmers would spin out of control, consuming ever increasing amounts of public expenditure.

If you will pardon the pum, recent reform efforts have bourne fruit. In euro terms, expenditures on financial support to agriculture has been flat since the mid 1980s. Over the last five years, expenditures have actually fallen in nominal terms.

The CAP continues to consume about 80 billion euros a year. This number is still far too high. Nevertheless, the recent fall in expenditures shows that even the most deeply entrenched subsidies can be dismantled if the political will is there.

Bank interest rate mark-ups increase to a 20 year high

Well, someone has to pay for those bonuses.....

It wasn't our fault

Adam Posen's candidature for the MPC is currently being reviewed in parliament. However, his evidence to the Treasury sub-committee should be sufficient to disqualify him having any influence over UK monetary policy.

Clearly, he doesn't understand the current financial crisis. Apparently, the Bank of England got it right all along...

It is important to recognize, though, that those failures on the financial stability side were not the result of inflation targeting or of central bank independence. The rise of the bubbles in the UK and elsewhere were driven by a combination of regulatory and supervisory failures with structural factors not entirely under UK policymakers’ control.

In fact, the continued anchoring of inflation expectations above zero under the current circumstances, without tipping either into deflation or being pressured upwards by temporary large public deficits, represents a triumph of the inflation targeting regime of the Bank of England.

Both the direct economic outcomes of the current crisis would have been worse, and the ability to respond with macroeconomic stimulus would have been far more limited, had this system of control over UK monetary policy not been in place.

This is classic public sector blame-shifting and evasion. First, he points the figure at regulatory failure, which means the FSA. Then, he uses the old unprovable counter factual - "things would have been much worse if we hadn't acted".

The plain fact is that the Bank of England controlled interest rates. For far too long, rates were too low, and this encouraged a speculative bubble that almost destroyed the financial system. True, the FSA are deeply implicated, but inflation targeting was a disastrous policy regime that pushed us into our current calamitous predicament.

Win on the way up, and win on the way down

Goldman continues to make money. Shouldn't regulators start to worry when regular punters don't understand how you made your cash?

Isn't that the lesson of Madoff?

From the NY times.

Up and down Wall Street, analysts and traders are buzzing that Goldman, which only recently paid back its government bailout money, will report blowout profits from trading on Tuesday.

Analysts predict the bank earned a profit of more than $2 billion in the March-June period, because of its trading prowess across world markets. If they are right, the bank’s rivals will once again be left to wonder exactly how Goldman, long the envy of Wall Street, could have rebounded so drastically only months after the nation’s financial industry was shaken to its foundations.

The obsessive speculation has already begun, along with banter about how Goldman’s rapid return to minting money will be perceived by lawmakers and taxpayers who aided Goldman with a multibillion-dollar cushion last fall.

“They exist, and others don’t, and taxpayers made it possible,” said one industry consultant, who, like many people interviewed for this article, declined to be named for fear of jeopardizing business relationships.

Startling, too, is how much of its revenue Goldman is expected to share with its employees. Analysts estimate that the bank will set aside enough money to pay a total of $18 billion in compensation and benefits this year to its 28,000 employees, or more than $600,000 an employee. Top producers stand to earn millions.

No green shoots here

In April, the US trade balance increased slightly. At the time, optimists pointed to this data, and suggested that the worst of the recession might be over. The idea was that consumers were buying more imports, confidence was returning, and if the trend continued, economic growth might resume.

The April data also had an international dimension. During the boom years, the huge US current account deficit was engine of world growth. On the back of the US consumer, and her insatiable appetite for cheap goods, China enjoyed double digit growth rates.

The optimism of April was killed by the reality of May. The US trade deficit slipped back, erasing the increase recorded the previous months.

No green shoots here.

The Bank of England is out of control

The Bank of England has stopped being a central bank, it is now an adjunct of the goverment, trying to prop up economic activity by printing cash.

The disconnect between reality and its previous central banking activities was amply demonstrated by a press release issued today:

The Bank is today publishing a consultative paper setting out proposed extensions to its Asset Purchase Facility (APF). It intends to introduce in the near future a Secured Commercial Paper Facility to support the provision of working capital to a broad population of companies. The facility will be designed to contribute to the APF’s objectives of improving liquidity in credit markets that are not functioning normally.

Think about that for a moment. The Bank of England is going to introduce a new cash creation operation to support the "provision of working capital to a broad population of companies". The central bank will begin to feed liquidity straight into companies, bypassing the banking sector directly.

Central banks are supposed to ensure price stability. They shouldn't be trying to replace commercial banks and supporting industry directly.

This is madness.

Where did the quantitative easing money go?

In March, the Bank of England hoovered up ₤15.3 billion of government debt. Everyone else was happy to sell. On a net basis, the BoE was the only institution that actually accumulated any holdings of government paper. These purchases were, of course, the infamous quantitative easing, which the Bank is using to affect monetary conditions, given that the bank rate is close to zero.

Lets remind ourselves why the Bank of England began creating money. This strategy is supposed to improve liquidity conditions, reduce interest rates, and lead to higher lending. However, government yields have actually crept up in recent weeks. So, what is going wrong?

The answer lies with who is buying the debt. The biggest sellers of government paper were non-residents. This raises a troubling question; if an foreign holder of a UK government bond sells to the Bank of England, how does this help liquidity conditions in here in the UK?

The second largest seller were non bank resident investors. Again, it is not entirely obvious how these sales helps credit growth. It might help to the extent that the proceeds of these sales are placed in UK banks. However, yields on bank deposits are lower than government debt, so that would appear to be an unlikely destination of the funds.

I am going to take a wild guess and suggest that the proceeds of these sales went into equity markets. Over the last few weeks, equity markets, including the FTSE, have enjoyed a healthy recovery.

The suggestion here is not that quantitative easing is the primary cause of the equities recovery. Rather, it is that as equity prices have increased, bond holders have an incentive to sell government paper to the Bank of England and move the funds to equities. This pushes up equity prices further, pulling money from the bond market, raising yields on government debt.

So far, the QE strategy has been riven with inconsistencies. The initiative was supposed to help corporate lending. However, the bank has bought government paper instead. Very little of the new money has gone into banks. Most of it has gone out the door or into the equity markets.

One thing is for sure, within about 18-24 months, this massive, historically unprecedented expansion of high powered money will lead to rapidly increasing prices.

So this is what a recession looks like....

At least the decline seems to have abated over the last two or so months.

Jon Stewart calls out Jim Cramer

These three clips are just brilliant. Watch it all. (I found the clips from Nakedcapitalism.com)

I don't think this interview could happen in Britain. Take, for example, the Lloyds scandal. Has any newspaper or TV channel asked any serious questions about the destruction of a perfectly healthy bank.

The Daily Show With Jon StewartM - Th 11p / 10c

Jim Cramer Unedited Interview Pt. 1

Daily Show Full Episodes
Important Things w/ Demetri Martin

Political Humor
Jim Cramer

The Daily Show With Jon StewartM - Th 11p / 10c

Jim Cramer Unedited Interview Pt. 2

Daily Show Full Episodes
Important Things w/ Demetri Martin

Political Humor
Jim Cramer

The Daily Show With Jon StewartM - Th 11p / 10c

Jim Cramer Unedited Interview Pt. 3

Daily Show Full Episodes
Important Things w/ Demetri Martin

Political Humor
Jim Cramer

Alice's bubble wrap

Drag Me to H-ll

Subprime mortgages as a horror movie.

Credit card delinquencies hit index record

As I said before, credit cards are the new subprime.

The Next Big Bailout Decision: Insurers

Greenspan Yet Again Blames Others for Housing Bubble

Talk to the hand, Al, no one is listening.

House prices 'could fall by further 55 per cent'

You mean I could actually afford to buy a house?

Who answers the phone in the US Treasury?

Since the Obama administration took over on January 20, the US Treasury has effectively been out to lunch.

Sterling heading for euro parity

I hope I am not labouring the point here, but New Labour's fiscal madness is pushing the UK economy towards disaster. We are drifting towards a currency crisis. Why can't anyone in authority see what seems so obvious to anyone who bothers to look at the Sterling:euro exchange rate?

The pound dropped to a fresh record low against the euro on Thursday, breaking through the 95p for the first time, as the prospect of further interest rate cuts from the Bank of England continued to punish the currency.

The pound was also undermined as a government report showed the UK’s budget deficit widened to a record level in November as tax revenue declined in the face of the worsening recession and takes the losses for the week against the euro to more than 6 per cent.

Riot in Iceland

The BBC reports that the Icelandic masses are on the move. Several hundred stroppy protesters gathered outside the city's main police station to shout and stomp at the injustices perpetrated upon them by the world financial system.

Lets be honest, Icelanders don't have much experience at rioting. These demonstrations are going nowhere. Brits, on te other hand, have centuries of accumulated know how of street protests and anarchy.

Can you imagine what is going to happen when Reykjavik-on-the-Thames finally blows up.

UK property - another 15 percent fall next year?

Two stories today that illustrate just how precarious the UK housing market is right now. The market may have slipped 16 percent relative to the peak. However, here are two stories that suggest that things are about to get much worse.

The first, from the Telegraph, highlights the huge number of empty homes in the UK. When prices were going up, it made sense for speculators to buy and hold properties rather than rent them out. It was supposedly much easier to time the market with a vacant house whereas a rental property would contain those awkward renters with their six month contracts.

"Almost 1 million homes are standing empty across the United Kingdom, and the vast majority – more than four out of every five – are believed to be owned by private landlords.

Some landlords might be actively trying to sell, or planning refurbishment, while many have simply given up on their empty properties. Whatever the reason, the Empty Homes Agency (EHA) believes that a staggering 85pc of empty homes in this country belong to landlords.

The EHA claims that there are more than 762,000 empty residential properties in England. Based on earlier figures, about 650,000 of these are believed to be owned by private landlords, and almost half of these are thought to have been empty for more than six months. Almost 1m homes are standing empty across the United Kingdom, and the vast majority – more than four out of every five – are believed to be owned by private landlords. The charity estimates that there are at least another 77,000 empty residential properties in Scotland, plus 50,000 each in Wales and Northern Ireland."

Meanwhile, the Financial Times reports an increase in voluntary repossessions in the UK:

"Banks are seeing an increase in the numbers of homeowners deciding voluntarily to hand back their properties because they cannot afford to keep up mortgage payments. Voluntary repossessions involve the bank selling the property at auction but this will not show up in official figures as a repossession because there has been no court order.

The phenomenon is widespread in the US, where it has been nicknamed jingle mail because homeowners often post their keys to lenders if they cannot make the payments and no longer have any equity in their homes. It was also common in the UK recession of the early 1990s when homeowners were in negative equity."

With huge supply and rising repossessions, it isn't too hard to imagine a surge in supply which will quickly lead to outright panic amongst speculative investors.

A further 15 percent fall in prices next year looks very likely.

Brown demand rate cuts

It seems that Mr. Brown is a little disappointed in HSBC. The bank won't pass on the recent interest rate cuts to its borrowers.

The Abbey is also in the doghouse. It is about to increase all tracker rates by 0.5 per cent tomorrow. Furthermore, it will not offer tracker deals to anyone without at least a 25 per cent deposit.

A Downing street spokesperson said "The Prime Minister is very clear — we are taking the action we are taking in order to see that more mortgage holders and small businesses do feel the benefit of that action. When official rates are cut consumers would expect to see the benefits of that."

Of course, the banks are absolutely right to resist this crude political pressure. Banks should set whatever interest rate they like. Of course, their rates should be sufficiently prudent to avoid future losses, which could result in a bank failure and a taxpayer bailout. This latter question, which is essentially a risk management issue, should be a matter for the regulator and is of no direct concern to Downing street.

However, it is a sign of the times. Due to years of poor risk management, the banks have unwittingly walked into a New Labour trap. The worst sort of interventionist tendencies are now coming out. Brown needs growth, and since the government now effectively owns the banking system, he thinks he can demand rate cuts, regardless of the commercial interests.

Browns frantic demands for mortgage rate cuts also illustrates another unanticipated development in the crisis. The Bank of England have lost control of monetary policy. The MPC may cut its official rate, but banks are unwilling to follow.

Sterling crashes

It is down 13 percent this month alone.

Does anyone see a problem here?

Is this a good time to cut interest rates?

Should Darling pay bank shareholders dividends?

It is a tough question.

On the one hand, it seems ridiculous for the government to be pumping in new capital, only to see shareholders receiving dividends, which could have also gone to improve capital adequacy.

On the other hand, it won't be easy to persuade new shareholders to invest money in banks if the government forbids dividend payments.

However, this problem was always going to arise once the government decided on a partial nationalisation. If Brown and Darling had gone the whole way and completely nationalised the banks, there would be no private shareholders to worry about. Once the government had stabilised bank balance sheets, it could privatise the banks, and the taxpayer would get the full value of the capital injections.

A partial nationalization was always going to end up as a dog's breakfast.

UK Mortgage approvals down over 60 percent

It is important to keep a sense of perspective about the credit crunch. It is not the case that credit has dried up completely. In August, banks handed out over 40,000 mortgages to people buying homes.

Banks have simply tightened up their lending criteria. If you want a mortgage today, you better convince the bank that you can pay them back. That means a big deposit, some credible proof of income and a house purchase that doesn't leave you crushed under a ton of debt. In fact, the credit crunch is really a return to prudent old fashioned banking.

The really worrying thing about the credit crunch is that sustainable economic growth in the UK seems to be inconsistent with responsible banking practices.

The interbank crisis - this picture says it all

The credit crunch is now almost 14 months old, and the disruption in financial markets is reaching unprecedented levels. The interbank market has all but collapsed. So just how bad have things become? Why have things reached this desperate situation?

The chart above tracks the spread (i.e. difference) between the interest rate on 3 month interbank loans and the rate on gilt repos. For those unfamiliar with the term "gilt repo". It is a loan between two parties where the borrower offers collateral in the form of a gilt, which is a UK government treasury bill. It is therefore a riskless loan because in the event of default, the lender keeps the gild. An interbank loan is unsecured and therefore much more risky.

With the explanation over, lets look at what has happened to the spread in the last 20 or so months. Before the credit crunch, the spread was just 0.12 basis points, or 12 basis points. Yesterday, the spread was 1.96 percent or 196 basis points - an unprecedented level. In fact, this week's Bank of England interest rate reduction had absolutely no effect on interbank interest rates.

Why has the spread remained so high after the most extraordinary attempts by the Bank of England and the governmetn to bring it down and return the interbank market to normality. There are three explanations.

The risk premium is now permanently higher

The Bank of England don't like to hear this, but interbank spreads may be permanently higher due to the increased risk of lending within the banking system. Out of the top 10 mortgage lenders in this country, two have failed and a further two were taken over. Other banks have seen their share price collapse as investors have become increasingly aware of a lack of bank capital.

Therefore, it should surprise no one that the risk premium, i.e. the spread, should rise accordingly. Moreover, attempts to bring it down are bound to fail. Therefore, the banks, the BoE and the government just have to live with the new high risk reality.

More banks may fail

The higher spread could also represent a perception that more banks are likely to run into trouble in the future, and despite the best efforts of the authorities, the risk of loss remains. Therefore, it would be unwise for any bank holding a large amounts of cash to lend these funds, especially over a long maturity like a year.

This explanation differs from the first because it touches on the credibility of the government itself. It may find it difficult to find the resources to bail out banks who run into trouble in the future. Whatever Darling and Brown may think, the government can not count on infinite amounts of taxpayers resources to fix the banks.

Bank bailouts are very expensive. The Northern rock nationalisation added about 7 percent of GDP to the government debt stock. Bradford & Bingley wasn't quite such a ghastly failure, but it too added billions of pounds of liabilities that the government are now having to clean up.

Central bank credit operations may be undermining the market

Central banks within Europe and North America have now become not only the lender of last resort, but the only lender. Central banks slipped into this difficult position by offering increasing amounts of credit at below market interest rates. The interbank market simply cannot compete with this massive injection of subsidised credit. Moreover, any bank tried to access the regular market would stand out, raising questions why it wasn't going to the central bank in the first place.

Pump, pump, pump

Whatever the reasons behind the unprecedented increase in spreads, central banks are working desperately to bring the spread down. They are pumping out unprecedented amounts of liquidity. Many countries have begun to guarantee deposits. A worldwide move to nationalise banks is well underway, with the UK in the lead.

Make no mistake, it is a desperate situation.

Alice's bubble wrap

UK 'To Be Worst Hit' in Crunch

Its back to being the sick man of Europe:

"High personal and government debt levels were cited by the experts as reasons behind the potentially sharp downturn. Moreover, the banking sector - in which the credit crunch originated and has had its biggest effects - is particularly important to the UK economy, when compared to its European rivals."

FTSE 100 suffers worst drop in history as banking crisis intensifies

And it is down over 30 percent since its peak.

Ireland; still trying to ramp up housing

It is a sickness...

"Should the (Irish government) budget contain measures to boost the property market? Ronan O'Driscoll argues 'Yes', that by encouraging the sale of 30,000 unoccupied homes, the Government could inject €10 billion into the ailing economy,...."

New data on Spain housing market labeled ‘dubious’

Fixing the numbers is another modern illness. If the number doesn't show a crash then the crash hasn't happened....

"Pundits are already mocking a new index of housing prices in Spain, which was supposed to bring some clarity to the market. According to the data released by the National Institute of Statistics, property prices in Spain fell a mere 0.3 percent from June 2007 to June 2008, despite the widespread reports the market is in the midst of a free fall.

The index said resale prices dropped 4.9 percent in the year, but new home prices actually rose 5.3 percent—a laughable assertion, considering the hundreds of thousands of empty homes on the market."

U.S. to recover in spring, economists' group says

Hope springs eternal.

Bush: Plan to solve credit crunch will take time

But not quick enough to save us from calamity.

FHA Will Take on Subprime Loans Shunned by Lenders

Perhaps, the Paulson bailout was a diversion. The FHA could be the real vehicle for rescuing the bankings system from subprime.

"The Federal Housing Administration has grown so large that by the end of the year it will guarantee mortgages for three in 10 U.S. borrowers, many of whom have bad credit or loans that required no verification of income. Congress wants FHA to do more. The Hope for Homeowners program, unveiled Oct. 1, authorizes the agency, part of the cabinet-level Department of Housing and Urban Development, to guarantee up to $300 billion of 30-year, fixed rate home loans for struggling borrowers over the next three years."

How did it all happen?

Lots of answers explaining why financial markets have just gone mad. a) recency effect: b) bandwagon effect: c) beneffectance: d) confirmation bias: e) hyperbolic discounting: f) optimistic bias: g) overconfidence bias.

Take your pick....

Frosty Times: Why Iceland Matters

This has to be the most unlikely headline of the day.

German News Update......Hypo Real Estate Bailout

From immobilienblasen.

Term Auction Facility Increased to $900 Billion, With No Apparent Success

Oh boy.....

How close to capitulation?

Robert Peston thinks its serious.

For the latest blog posts on the housing crisis check out housingblogwatch.

The crisis moves to Europe

About two weeks ago, the German Finance Minister Peer Steinbrueck gave an arrogant speech about the inevitable decline of the US as a superpower. He placed the blame squarely on the financial excesses of Wall Street.

Rather than meditating on geo-politics, he should have spent more time considering the financial difficulties in his own country. One of Germany's largest banks - Hypo Real Estate - is in serious trouble. More worryingly, the German government's attempts at saving the stricken back are falling apart. The commercial banks, who had agreed to put up the money to save Hypo, have just witdrawn their support.

So what happened? According to Die Welt, the numbers didn't add up. Hypo Real Estate's financing needs exceeded the bailout plan guarantee, The paper also reported that the bank will need 20 billion euros by the end of next week and 50 billion euros by the end of the year. It doesn't get any better after that, the bank will need a further 100 billion euros by the end of 2009.

The Hypo story takes the financial crisis in a different direction. While everyone in Europe was laughing their heads off at the chaos in the congress over the US bail-out, the crisis has migrated to Europe.

It took about two weeks for US politicians to put together a bailout plan. Sure, they produced an unpopular, ugly and expensive package, but it is in place, and US banks now have a dumpter to take away their rubbish.

How long do you think it will take for European politicians to do the same thing? And do you think the inevitable European bailout plan will be an improvement on the Paulson plan? By the time, European banks have a safety net, people will consider Paulson as a genius.